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CA Intermediate · Auditing and Ethics · Nature, Objective and Scope of Audit

In auditing Himalaya Pharma Ltd., CA Tanvi notes that management has overridden controls to book year-end sales entries. She also finds that the audit team accepted the CFO's explanation for an unusual journal entry without corroboration. Which response best reflects the required attitude under the SAs?

She should maintain professional scepticism, treat management override of controls as a presumed fraud risk, and obtain corroborating evidence for the unusual journal entry. A management explanation alone is not sufficient appropriate audit evidence, and the entry cannot be ignored without assessing it.

  1. AAccept the explanation, as management representation is conclusive evidence
  2. BMaintain professional scepticism, remain alert to management override risk, and obtain corroborative evidence for the entry instead of relying only on the explanationCorrect
  3. CIgnore the entry because it is below overall materiality in all cases
  4. DReport immediately to the police before any further audit work

Explanation

Professional scepticism means a questioning mind and critical assessment of evidence. Management override is a presumed risk in every audit, so unusual journals need corroboration. Representations are not a substitute for other evidence, and the entry cannot be dismissed without assessing its nature and size.

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